AP Micro Microeconomics: Market Structures 3 — Questions and Answers
Question 1: A monopolist practicing perfect (first-degree) price discrimination will produce a quantity where:
- Marginal revenue equals zero
- Price equals marginal cost for every unit sold (Correct answer)
- Average revenue equals average total cost
- Price exceeds marginal cost by the maximum possible margin
Correct answer: Price equals marginal cost for every unit sold
With perfect price discrimination, the firm charges each consumer their maximum willingness to pay, eliminating consumer surplus and producing where P = MC.
Question 2: Which market structure generates the largest deadweight loss relative to the competitive outcome?
- Monopolistic competition
- Oligopoly with collusion acting as a monopoly (Correct answer)
- Oligopoly with Cournot competition
- Monopolistic competition in the short run
Correct answer: Oligopoly with collusion acting as a monopoly
A colluding oligopoly that acts as a joint monopoly restricts output to the monopoly level, producing the greatest deadweight loss.
Question 3: In a Cournot duopoly, each firm chooses its output assuming:
- The rival will match any price change
- The rival's output remains fixed (Correct answer)
- The rival will leave the market if undersold
- Both firms share equally in total market output
Correct answer: The rival's output remains fixed
The Cournot model assumes each firm treats the rival's quantity as fixed when choosing its own profit-maximizing output.
Question 4: Excess capacity in monopolistic competition refers to the fact that in long-run equilibrium:
- Firms earn zero accounting profit
- Firms produce below the output level that minimizes average total cost (Correct answer)
- Consumer surplus is maximized
- Marginal cost exceeds average total cost
Correct answer: Firms produce below the output level that minimizes average total cost
Monopolistically competitive firms operate on the downward-sloping portion of their ATC curves, producing less than the minimum-cost output.
Question 5: Which best describes the Bertrand model of oligopoly?
- Firms compete by choosing quantities simultaneously
- Firms compete by setting prices, leading to P = MC in equilibrium (Correct answer)
- A dominant firm leads and others follow in pricing
- Firms collude to maximize joint profits
Correct answer: Firms compete by setting prices, leading to P = MC in equilibrium
In the Bertrand model, price competition between firms with identical products drives price down to marginal cost, replicating the competitive outcome.
Question 6: A monopoly's marginal revenue curve lies below its demand curve because:
- The monopolist faces a perfectly elastic demand curve
- To sell additional units, the firm must lower price on all units sold (Correct answer)
- The monopolist's costs rise faster than revenues
- Fixed costs are spread over a larger quantity
Correct answer: To sell additional units, the firm must lower price on all units sold
Since the monopolist must reduce price to sell more and cannot price discriminate, MR from additional units is less than the new price.
Question 7: Which outcome is most likely when oligopolists face a prisoner's dilemma situation?
- Both firms cooperate and split monopoly profits equally
- Both firms defect, resulting in lower profits than if they had cooperated (Correct answer)
- One firm exits the market to restore equilibrium
- The government intervenes to enforce cooperation
Correct answer: Both firms defect, resulting in lower profits than if they had cooperated
In a prisoner's dilemma, the dominant strategy for each firm is to defect (cut price or increase output), resulting in a Nash equilibrium with lower profits for both.
AP Micro Microeconomics: Market Structures 3
A monopolist practicing perfect (first-degree) price discrimination will produce a quantity where: